Bill Wiseacre considers himself to be a fairly experienced entrepreneur and savvy business person, so when he was approached by his old friend, Roger Redacre, who was looking for a partner in a new restaurant concept, he jumped at the opportunity. The restaurant would be a Polynesian-themed restaurant that would guarantee to have diners in and out in 50 minutes. It would be called Hawaii-Five-O. Bill felt confident moving forward, as Roger had managed some very high end restaurants before starting this one and Bill figured at worst, he’d enjoy free meals there and at best, he’d make some real money if the concept expanded. The space that Roger found to locate the restaurant fronted a main road in a busy area and the rent that they negotiated was reasonable for the location. Since this was a small space and Bill had reviewed a good handful of leases before this one, they figured that they wouldn’t need to engage a lawyer to review or negotiate it for them. The lease was a straightforward triple net retail lease. As the restaurant was to be operated by a newly formed legal entity, the landlord wrote the lease so that the lease was in the name of the new company and was guaranteed by Bill and Roger, despite Bill’s objection. Reluctantly, Bill relented, not wanting to miss a great opportunity. The lease contained a relocation provision that said that the landlord could relocate the tenant upon 30 days advanced notice to another location in the shopping center. The landlord agreed to pay all of the costs of relocation and agreed not to move them to a smaller space, so it seemed like a reasonable concession. With the lease terms negotiated, they signed the lease and subsequently built and opened the restaurant.
Everything seemed to be going smoothly with the restaurant until Bill received a letter from the landlord telling them that Fried Sweets, the restaurant concept that was sweeping the nation, needed a larger space so the landlord was relocating Hawaii-Five-O to the another open space in the center, which faced the side street rather than the front. From there, things started to deteriorate quickly. The landlord did rebuild the restaurant in the new location, but since they were no longer attracting walk-in traffic from the main road, sales dropped off dramatically. Roger, smelling disaster, left town—leaving Bill responsible for the operation of the restaurant. Bill, not having the experience to run a restaurant, decided to shut it down to cut his losses. Although Bill thought that would be the end of it, the landlord sued the tenant along with Bill and Roger for the costs associated with the remainder of the lease term. Since the tenant was insolvent and Roger had skipped town, Bill was stuck defending the claim and had to settle with the landlord for a significant sum of money.
The Momentum Law Group perspective:
- A commercial lease may be one of the largest expenses your business incurs, so it’s certainly worth trying to negotiate both the best business and legal terms you can get!
- If the landlord won’t back off the relocation provision, agree in advance to where they can move you and seek to have them reimburse you for any “down-time.”
- Many landlords simply won’t enter into a lease without a guaranty from the principals; in that event, try to limit your exposure through a sunset, cap or other mechanism.